Will Investors Buy into Operation Twist
Yesterday, the Federal Reserve concluded its two-day meeting with the widely anticipated announcement of “Operation Twist.” This program involves the selling of shorter-term Treasury securities and the buying of longer-term securities in an effort to lower long-term interest rates to help stimulate the economy. The Federal Reserve cited “significant downside risks” to the economy as the reason for taking this action.
Following the Fed’s announcement, markets worldwide sold off sharply. Yesterday, the S&P 500 Index declined rapidly as the markets closed, down 2.94%. Selling pressures gained momentum overnight and led to global sell-offs, including a 4.90% decline in European stocks. This afternoon, U.S. stocks were down 3.5% and U.S. Treasury bonds were rallying as the bellwether 10-year note was trading at an all-time low of 1.76%, as investors fled to safety.
Since the U.S. debt downgrade, the S&P 500 has remained in a 100-point trading range between 1,120 and 1,220, with volatile swings fueled largely by the uncertainty of the European debt crisis and the anticipation of the Fed’s monetary actions.
Our long-term outlook for the world economy continues to be one of below-average growth, with the risk of inflation on the rise. Our asset allocation in our diversified managed portfolios is overweight U.S. large-cap stocks, high-yield bonds and precious metals. We continue to maintain an underweight in international equities and investment-grade bonds.
As we have said in past commentaries, sell-offs such as this may create opportunities for long-term investors who can take advantage of undervalued securities. If investors believe they are being well compensated for the risks they are taking, low prices today may represent tomorrow’s bargains. At today’s levels, certain stocks look increasingly attractive relative to bonds. Currently the S&P 500 has a dividend yield of 2.31%, exceeding all Treasury securities maturing in less than 15 years.
We encourage members to stick to their established financial plan. Members who change their risk profile to a more conservative profile solely because of the Fed’s action may be doing so at the wrong point in the market cycle. While painful in the short-run, we expect the volatility to continue. History tells us that market crises are often looked back on as opportunities. If you have questions about your investments or your financial plan, please call a USAA advisor at 1-800-531-8722.